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# Jonathan Wagner's  Instablog

Jonathan Wagner
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Coder, with a passion for the stock market. I Have been interested in the stock market since I was 12 and I have dabbled in experimental technical analysis methods such as non-time correlated fractal market analysis. I am the creator of the #1 drawing on maps application the web called... More
• ##### Share Price Reconciliation

One of the biggest problems I had with stock valuations is their actual share prices. While subjectively a 1% move will make an investor the same amount of money as a 1% move in any other stock, a 1% move in a stock with 500 million shares outstanding will affect the market differently then a 1% move in a stock with 10 billion shares outstanding.

Ultimately what matters is the amount of money being invested into a company. However, market capitalization is less valuable from a technical analysis perspective but can we have our cake and eat too? The answer, I believe, is yes.

In this article I will present a very simple method of reconciling stock prices that makes them more valuable both technically and fundamentally through something I call Reconciled Share Price or "RSP".

The formula is simple, you take a share's current market capitalization and divide it by a common number, I personally use 100 million, but any number will suffice. You use this common number for all stocks you want to reconcile. Let's use two companies in a common space to demonstrate, Google (GOOG) and Yahoo (YHOO) as of December 12, 2012.

Price: \$697.56
Shares Outstanding: 328.59M
Market Cap: 229.21B
RSP: \$2,292.10

Yahoo
Price: \$19.38
Shares Outstanding: 1.18B
Market Cap 22.92B
RSP: \$229.20

While single values might give some insight to scale, they don't serve much more utility then viewing the market capitalization directly, however, with the share prices reconciled we can plot them on the same chart to open an entire new world of technical and fundamental analysis.

(click to enlarge)

The RSP Delta Running Total Oscillator is constructed by taking the daily difference in RSP and finding the difference of those values (first differential) followed by a running total of that differential.

What this particular technical indicator shows is the pace at which Yahoo is acquiring capitalization versus Google. On the 18th after disappointing earnings by Google, Yahoo's pace at which it was acquiring capitalization finally went positive. Obviously a direct relationship cannot be expressly stated but there is a strong correlation pointing to the idea that on the days following the 18th investors saw more potential for growth in Yahoo then they saw with Google.

How could RSP be used in fundamental analysis? The rate at which a company is acquiring market capitalization is very important because this affects all valuations. If you have a pair of competitive companies, a long term evaluation of capitalization acceleration might give very important clues to where a stock is in its life cycle.

If a stock is close to book price and has slow RSP acceleration, this could mean the stock is prepared to accelerate if all other things are in place such as earnings growth. Alternatively, if you have a stock with a slowing capitalization acceleration but a high price to book, this might indicate that the interest in a stock's growth potential is waning.

In most cases, I am of the opinion that the best form of RSP evaluation is between two companies, one of which could be considered to be in a mature phase of its life. In order to properly evaluate acceleration you need a proper reference point.

Bottom Line
Yahoo is currently acquiring capitalization at a faster rate then Google. This is probably being fueled by confidence and support in Yahoo's new CEO Marissa Mayer.

Requests
I will be using RSP in future articles for valuations of companies. If you're interested in me doing some specific analysis on particular stocks, please let me know.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

• ##### Why Apple Makes Me Nervous

When I bought my first iPad it was after refunding my net book because I had a practical reason for it. Since the iPad was gaining so much traction it would only make sense for me to learn how to develop for it. I soon found myself using it an exceptionally large amount of time, more then I would of expected. Despite all the jokes and parody that went into the iPad just being an oversized iPod Touch, Steve Jobs again created a completely new space in digital hardware. So it might seem odd that having positive experiences with Apple (AAPL) products that I would be skeptical of Apple's future, but I believe there are some good reasons to be skeptical. In this article I will talk about what would make me bullish about Apple and what series of events would make me bearish.

The Jobs Concern
Ever since Steve Jobs's passing there have been questions about thefuture of Apple. You have critics arguing that Apple isn't open, or that Apple is better designed, and Apple is over priced. However, investors should ignore almost all of that because the market decides who is right about all of those issues. The concern for Apple investors should revolve around management and how they will manage the brand, their most valuable asset, and how they will maintain an aura of innovation.

It's All in The Design
In Steve Job's biography it outlined how Jobs realized computers should look more like kitchen appliances than industrial machines. He recognized that rounded corners were used every where and applied it both the hardware and software. Apple constantly pushed the envelope when it came to design. When the original iMac came it out, it was considered awesome, but they soon realized that the design was getting dated and continually updated it until we ultimately got the sleek aluminum and glass design we have today.

Apple will soon have a design problem, if it hasn't already started, with their iOS. The Apple iOS is becoming quaint, and this is a serious issue. Simply put, people get bored. With most phone providers offering phone upgrades every 2-4 years this gives users ample opportunity to try something "new" and if the Apple iOS doesn't get a face lift, this could potentially affect their retention rates.

If Apple changes their iOS design for the better, this would make me bullish. If they leave it the same, or heaven forbid, make it worse this would make me bearish.

Apple Products vs Steve Job's Products
Can Apple deliver innovative products without Jobs? I don't know, because I haven't seen a new Apple product yet. The only Apple product I have seen is the iPad mini which wasn't so much an innovation as a trend following copy cat, though the commercials will say differently. Their other major new innovation was Maps, that on top of all the problems it had, brought nothing truly innovative to the table. Apple Maps was simply a product designed to fulfill Steve Jobs's "Themornuclear War" on Google (GOOG), and it failed.

Jobs left the company with a very strong product line but it's anyone's guess if regular, some what minor, revisions to it will sustain the company into the future. Will Apple be able to release another cash cow product like the iPhone with out Jobs? I am not sure, but what I am paying close attention to is if, or when, they release products that fall outside of the product line Jobs left with them.

Apple's Horsemen
If Apple continues to grow it is based on one thing: innovation. If management can continue to push innovation this will allow Apple to continue to maintain its throne as one of the biggest technology companies in the world. However, if it can't, there are a couple of things that should be watched for that could signal end of days for Apple:

1. Management Proves Incompetence
A series of events, supported by a strong push down in the market, proves management has lost its capability. Management has already made some foolish mistakes such as the green tech certification rejection and reversal.

2. Apple loses a lot on an "innovative" product
This will be a very strong indicator that Apple is on the decline. However this innovative product needs to make a huge dent not only in their reputation, but also their wallet. While Apple Maps might be considered by some to be a flop, I don't believe it has the necessary financial implications to fulfill this second horseman.

3. Management makes a business model Shift to try and recoup losses
Shifting to an innovative business model could actually save them, if they got to this point, but what would be disastrous is if they tried to emulate someone else's model. For instance if Apple tried to switch to an operating system licensing business model similar to Google's or Microsoft's.

Final Fallout
Once the above three occur this will be followed by a series of predictable events. They will start losing significant amounts of money and start burning through their reserve. In order to stop the blood loss this will be followed by progressively larger lay offs. Meanwhile they will be preaching about this next great thing that will change everything.

Finally, the biggest mistake of all: Management, in order to try and become profitable and make the share holders happy, will make a series of very bad investment decisions in stocks or otherwise which will result in significant losses. They might also move their large amount of money around in order to try and avoid losses by inflation, this will result in more losses when the economy goes through a natural recession putting a further weight on them.

Conclusion
70% of Apple's revenue comes from iPhone, a market they have beenlosing to Android, some of their other revenue streams are directly linked with this mobile infrastructure. This, of course, could be all wrong. I am not a psychic. They could continue to release innovative products. This was Jobs's dream for Apple after all. Also, keep in mind that if these things happen there is no solid time frame for them. It could be 5 years or 20 years. If Apple diversifies into other industries it is even more unlikely they will go away. That said, we should always be on the look out for history repeating itself because if we see the below image again, there will be no Steve Jobs safety net.

(click to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

• ##### A Home Builder Rally

When I was in Austin, Texas I had an interesting conversation with a now local business man. Austin is going through some what of a boom in technology and it is being called "Silicon Hills". This has resulted in a lot of tech company relocations. This business man who relocated there had a very hard time finding a house and this was after the sub-prime mortgage crisis.

The sub-prime mortgage catastrophe is some what well know. People who shouldn't of got mortgages did. The question is, who were all these people? Were they all just lower class citizens? There is a simpler explanation to not only to why the derivatives lost so much value but why the situation as a whole got so bad.

People were getting houses in areas that could not support them. High unemployment areas, low economic growth, etc. So when these people gave up their mortgages to the bank the banks were not only left with unpaid mortgages but they were left with bad underlying assets.

A House Builder Rally
The sub-prime mortgage might of created a lot of houses, but a portion of them were in bad areas. If unemployment continues to drop (this is key), there will be a demand for houses in the good areas again. This might catch a lot of people off guard because of the common general understanding of what caused the sub-prime mortgage collapse. The volume of houses is not as important as where the volume is.

I am not alone in this belief, Warren Buffet is also banking on a housing recovery.

A stock to watch is D.R. Horton (DHI) because this is one of the biggest homebuilders in the USA. If they start to pull up substantially, the other stocks in their sector will also certainly start to climb.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Dec 18 4:10 PM | Link | Comment!